 Hello, and welcome to this session in which we would learn about tax return preparer. We're gonna learn who they are How should they behave? What procedures should they follow and what penalties are imposed on them in case of violation? This topic is important for the CPA exam. So if you are a CPA candidate I strongly suggest you check out my website for head lectures calm I don't replace your CPA review course whether you are taking Becker, Roger, Gleam, Wiley or any other review course. I can be a useful addition I can help you add 10 to 15 points by explaining the material differently than your CPA review course. This is what I do and here's your risk Try me for a month. That's your risk Otherwise you cancel you lost a month The pay off is possibly passing your exam. Are you willing to take that risk? And if not for anything check out my website to determine how well or not well your university doing on the CPA exam I do have resources for other accounting finance tax courses as well Please connect with me on LinkedIn and check then check my linked in recommendation people who use my system to pass the exam Like this recording share it connect with me on Instagram and Facebook So who is this group tax return prepare well simply put any person who prepare taxes for Compensation now any person that prepare tax for compensation We're gonna have some clarification about this in a moment We're gonna determine who is not considered or who also employs one or more person to prepare for compensation You either do it yourself or you hire someone and you pay that someone Okay, to prepare all or a substantial portion of any return of tax or claim of refund under the Internal revenue code tax return prepare are different than tax practitioners tax practitioners required a license like a CPA EA Attorney and we talked about tax tax Practitioner when we spoke about circle or 230 and another recording remember tax practitioners They have unlimited representation right before the IRS so they can represent you in front of anyone in the at the IRS tax preparer They are they have they are they have a pin number That's how they are known by as their tax preparer and they have limited representation before the IRS So anyone can be a tax preparer simply put you will file Paperwork with the IRS you will obtain a peten and you will start to prepare return You don't have to returns. You don't have to be an attorney in EA pass any exam or anything like that Now we're gonna separate the tax preparer into signing prepareer and Nonsigning starting with signing the signing preparer is the primary person Responsible for the overall accuracy of the return or claim of refund Simply put they signed their name on the return and because they signed their name They are responsible for this return now often times especially in a for large return or for You know high net worth clients you might have or businesses that work If you have an image individual has businesses in several states you might have multiple parties engaged The person that signs the return is the primary person that person is responsible Okay, you can have a multi-state situation international tax return The person that put their name on the return that prepares name prepares signature. This is it. This is the Signing preparer the non-signing preparer Obviously, they have no primary responsibility of the overall return or the claim of refund because the primary person does They assist they're not just mechanical or clerical or intern Nonsigning preparer. They did some substantial work, but they are not primarily responsible include will Example would include preparers who provide advice that constitute a substantial portion of the return So simply put you are not clerical you're not just kind of shoveling paperwork You're not just collecting information. You are doing some work, but you're still not the primary responsible for the return For example an attorney provide work paper for total revenue The attorney for this client at up all the revenue and gave it to you as an excel sheet Okay, let's look at the persons who are not tax preparer. They are not considered tax preparer Well if you are an employee at a company and that's what you do You prepare your your your employer's tax return You are not considered tax preparer if you have a fiduciary duty and you're preparing a trust the return for a trust You are not a tax preparer a person who prepare a refund Claim in response to a notice deficiency notice not an original claim and be careful You want to know those those that group that's not considered a tax preparer a person who provides typing reproducing or other Mechanical assisting like clerical work like you know, usually then in the question day They put this in a form of an intern any person that provide tax planning like making projection Those are not tax preparer and you could see a question Which of the following is not a tax preparer, so you want to make sure you are aware of that Okay, how should tax preparer behave? Obviously, they should follow due diligence. Now. What is due diligence? Well, simply put making factual inquiries to ensure the clients accuracy and truthfulness and you want to make sure you follow the tax law Okay, now you can rely on the client information in good faith. You are not auditing them That's fine, but you cannot ignore you cannot look the other way if there's any conflicting Information information appear to be incomplete or inaccurate. You have to make reasonable inquiries if that's the situation Okay, so just basically simply ask them make the appropriate inquiries about the existence of documentation Okay, ask them if they have any proof for the cash charitable contribution Contribution that they are that they are claiming just simply ask them if they say yes You're gonna have to go with that as long as there's no reason otherwise to believe otherwise Okay. Now also when you discover that a taxpayer made an error or an admission From any document filed with the IRS you must let them know about the error or the emission immediately and let them know about the consequences And we talked about this in circular 230 tax preparer. They have to follow this due diligence Okay, what happened in case of violation? Obviously penalties are imposed now You're gonna have different penalties for different violations Not all violations are the same and also the supervisors at certain firms will be subject to that penalty as Well now we're gonna look at certain terms that you need to be familiar with In order to understand the responsibility of the tax preparer for one thing is a substantial authority What is when we say substantial authority substantial authority means? What are we relying on to determine whether something is an income to be included as income or something is a deduction? So we can deduct it. Okay, this is part of your due diligence You have to make sure you rely on substantial authority. What is considered substantial authority? Well, the primary authorities include provisions of the IR internal revenue code, of course any final regulation by the IRS Revenue ruling by the US Treasury Department and court cases. Those are considered primary authorities What's considered not primary authorities internal revenue bulletin? Administrative pronouncement administrative pronouncement and any press releases. Those are not primary Operative authorities now you need to know what is a Fruveless submission. So what is a? What is a return is considered a frivolous return? Well, when you emit information necessary to determine the tax liability or not including everything you saw a substantial Incorrect tax or willful understatement of tax liability. You're just under stating you're simply put under reporting your tax liability and You are doing this on purpose. You have a desire to impede the collection of the tax You're trying to hide this information Let's take a look at more terms that you need to be familiar with reportable and listed transaction What is a reportable transaction? A reportable transaction is a transaction that's specifically identified by the secretary of the US Treasury as either a tax avoidance Avoidance is a legal use to reduce your tax liability. It's nothing illegal or tax evasion But when but when a transaction is considered reportable You need to know what does that mean a reportable transaction elicit transaction is a transaction of one of the types of the transaction US Treasury has determined to be tax avoidance tax avoidance is Legal again, it's legal to reduce your tax liability. So just but you need to know what they are Now what is that? What is this reportable and listed transaction simply put certain transaction? They could be subject to abuse Subject to fraud subject that doesn't mean they are They are susceptible to that therefore what you have to do is you have to disclose them and there's a form You don't have to worry about this and the reason I'm showing you this is to kind of illustrate the concept So you understand what this reportable and listed item 45472 and specifically for example here This is an example of reportable transaction monetary transaction between the reporting corporation and a foreign related party So you are dealing between a corporate US corporation and a related party. That's foreign what happened here You could have you it could be subject to abuse and that's why when you have these transactions something like this All these transactions sale of stock sale of tangible property. They are considered considered reportable You just have to give us more information about them You have to report them because they could be subject to abuse. That's all what they are You just need to know and you're gonna see why do we have to know what is reportable and what's listed transaction more terms and not terms basically Terms or standard you need to be familiar with and certain percentages when we say more likely than not It means you have more than 50% chance succeeding in court This is the most stringent and you're gonna see how we're gonna be using this when we use the word Substantial authority it means you have more than 40% chance succeeding but less than 50 succeeding in court reasonable basis with disclosure if you have reasonable basis and you disclose it so basically You are taking a position, but you're disclosing the position and You have more than 20% chance of your position being upheld and you're gonna see how we're gonna be using this and Our global means you have less than 20% chance of your position being held in court Now, why do we need to learn about these things? The reason why we need to learn about these things because we need to know we need to learn about something called Unreasonable position. What is considered? Unreasonable position because we're gonna be using those standard to determine whether we consider this position is Unreasonable or not unreasonable or not. So what is unreasonable position? It's a position Unless it meets one of the following three conditions. It's considered unreasonable. So a position Unreasonable unless it meets one of those three conditions. Well, if you have a substantial authority Okay, disclosure is not an issue whether you disclose the the revenue that you are not reporting or The deduction that you are taking as long as you have substantial authority It means that between 40 to 50% chance winning then it's not unreasonable position if it meets that you are good Okay, as long as it meets a substantial authority standard. Okay, then it's not unreasonable Now remember here whether you disclose or not now if you are taken a position Okay, and you disclose it You just go you say look I am not including this revenue, but because I don't think it's taxable I'm telling you this upfront once you disclose it Then it will not be considered unreasonable position as long as you have a 20% of chance Succeeding in court whether it's revenue or you are taking a deduction. That's not supposed to be a deduction But you're not sure you're taking the position, but you're gonna tell the heiress look I'm taking this deduction I'm disclosing it to you as long as you have more than more than 20% chance succeeding in court Then your position is not considered unreasonable because you don't want to take an unreasonable position Okay, now if the transaction is a reportable transaction Remember we talked about listed transaction unreportable transaction like if it's a tax shelter or listed transaction because remember listed transaction is part of reportable transaction under those circumstances It will be unreasonable as long as you have more than 50% chance succeeding more likely than not then it's not unreasonable Position so notice when it's a reportable transaction the standard is higher You have to really have have a good chance of winning if it's a reportable position If it's if you disclose it you just need more than 20% chance if you have a substantial authority for a position It will not be considered unreasonable and as long as you have 40 to 50% chance Now you're saying how do we measure these chances? Those are subject subjective numbers, but but the key is to kind of understand the big picture Now there's a penalty for unreasonable position. Now when you take an unreasonable position, you could take it for With two things in mind and you could have fraud or you could be just negligent. Okay, what's negligent? It means it you did not do it intentionally Just basically you failed. It's an error the penalty is $1,000 or 50% of the income you derived from that transaction and Negligence would include any failure to make reasonable attempt to either comply with the provisions of the law of the IR Internal revenue laws or exercise ordinary and reasonable care in preparation of the return. So that's that's the penalty for fraud fraud is different Fraud is intentional. It's purposeful. It's misleading. It's willful. It's reckless If you are taken an unreasonable position And you are committing fraud the penalty obviously is higher There are penalties for endorsing checks. You cannot endorse a check. You cannot endorse a check Um refund. Sorry, you can endorse a check, but you cannot endorse refund check for a client. Okay There's a $350 penalty for endorsing or otherwise Negotiating any check issued to a taxpayer. Also, if you run if you operate a check cashing agency That caches endorses or negotiated tax refund checks You are subject also to a penalty if you are a tax preparer Also, there's a penalty for aiding or abetting and here the proof is on the irs And this penalty is basically you don't have it doesn't only apply to tax preparer So it's a thousand dollar penalty For return or document is imposed against a person who aid notice You don't have to be the tax preparer who aid in the preparation of the return or the document They have or have reason to believe would result in an understatement of the tax liability of another person Simply put someone's given you in quote a tip to reduce your taxes and that tip is not really Legitimate tip and they know it's not legitimate tip. So this penalty applies to people other than the tax preparer It could be somebody an advisor an attorney a friend a corporate officer executives anyone now if you are Involved in this from a clerical assistance perspective You're just putting the the return together then you don't have to worry about the penalty You don't incur the penalty because you're not really making the decision You participate it under return, but usually that's a secretary's job in a CPA firm Okay, there are penalties for an ethical behavior This is to basically protect the taxpayer and those are I call them the 50 dollar penalty And you're gonna see they're all 50 dollars The first one is failure to provide a copy that the taxpayer unless reasonable cost exists Reasonable cause not cost And for example now we are going through COVID if you cannot get the return to the client and I know I I know one person I prepared their taxes to that person and that person doesn't have an email. Okay I'm just giving you the example. Well, and he doesn't want to meet any person in person I can mail it to them, but I cannot give it to them in person So unless a reasonable cause exists, there's a penalty of 50 dollars simply put You have to provide a copy to the taxpayer. Okay, and the max is $27,000 per year Now remember these every all the numbers that I mentioned in this recording They could be subject to change because they change from year to year Failure to sign the return. Look, you're you're supposed to sign the return $50 max $27 failure to furnish your identification number again $50 with a max of $27,000 Failure to properly retain record. You have to retain the record for three years. Okay You have to have a copy of the return or copy of the return or listing clients Listing clients the penalty is $50 per Uh per return again a total of $27,000 also Failure to file correct information returns. This is on the employer end. Like for example hr blog They'll have many people working for them By July 31st, they have to submit to the IRS the name of their tax preparers Their tax identification number and the place that they work. Okay other procedural Procedural requirements that the tax preparer will have to comply with is to They must sign. I told you they must sign the return After the completion of the return, but before it's presented at the taxpayer So you have to sign it and give a copy to the taxpayer to the log. This is your return. I already signed it Now it's your turn. Also. Remember we talked about retaining record You have to retain the record for three years. Otherwise, there's a penalty I mentioned this already twice three years or you can keep a list or remember or You can keep a list that include the return That include for the returns and claim prepared the following information So you need to keep the following information if you don't keep the return the taxpayer's name Taxpayer identification number their tax years the type of return or claim prepared. Okay now when we said Of the return period, what do we mean by the period? When does the period start? The return period is 12 month period beginning July 1st each year So whenever you did the return the July 1st you count three years from July 1st This is the period. Okay. I don't think you have to worry much about this This is maybe an EA enrolled agent exam question. But yeah, now you're aware of it other procedural requirement Um, again, we did the slide. Let's move on. I guess I have a copy of this Disclosure of the taxpayer information. There's a penalty if you disclose information Look you owe you owe them a duty of confidentiality. They're giving you their information their social security Their w2s their business return their banking information. So you want to make sure you this is confidential Okay So if you disclose the information or uses the information without the taxpayer consent So you cannot disclose it or use it without their consent. Okay, the penalty is not imposed. Obviously If the disclosure was specifically for preparing assisting in preparing or providing services in connection with the preparation of the tax return There are some exceptions. You're gonna see see them on the next slide. Okay, but let's assume you you needed to give this return You prepare their business return and you need they have a partnership and you need to give k1 to another person Well, you are giving this information to help the other person because they cannot prepare their 1040 without the k1 That's different. Okay. The penalty is $250 per disclosure max of 10 000 again I'm gonna keep repeating this those numbers will change now if you if you disclose on purpose Not only or recklessly well You are guilty of a misdemeanor In subject to $1,000 in fines and up to one year in prison as I told you there is an exception for this And we looked at some exceptions if you're following court order or the IRS revenue code They told you to they told you to give them the information and it's legitimate if you have the client consent Here the client consent has to be in writing explicit and specific to disclose Again, if you want to give the tax return within the same firm For example, somebody else would like to review the return within the same firm For the purpose of quality or peer review to the extent necessary to accomplish the review simply put CPA firms what they do You have your business, you know CPA firm and we have CPA firm a They will hire CPA firm b to check their paperwork and you know, why it's quality control They want to make sure they want to bring new sets of eyes and external party. It's part of their quality control That's okay as long as that's for that limited purpose Again for the use in assisting or preparing providing services In connection of a tax preparation as I said, it's k1 Or you're providing the return for another individual or another party to prepare their state or local return That's perfectly fine. That's perfectly fine. Those are exceptions and I spoke about this exception earlier At the end of this recording, I'm going to remind you that if you are a CPA candidate I strongly suggest you check out my website farhatlectures.com keep your CPA review course I'm not saying to to get rid of them. I wish I can tell you get rid of them and I I will cover you I can't do that. I can be that useful edition By explaining the material differently. It will expand your mind help you understand it better Past the exam. Good luck. Study hard. Stay safe